Silver Remains a Monetary Metal – Precious Metals Supply and Demand

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by Pater Tenebrarum, Acting Man:

Silver Price Driven by Reservation Demand

The price of gold went up a buck last week, but the price of silver dropped back 13 cents. And the gold-silver ratio marches further upwards.

Keith spoke at a conference this week, about how to analyze the fundamentals of supply and demand in gold and silver. He talked about the basis of course.

Silver coins – silver prices are partly influenced by an industrial demand component, but the fact that they move most of the time with the price of gold indicates that the main price driver remains reservation demand by investors. [PT]

Another speaker spoke later, about the supply and demand fundamentals of silver. He covered all the topics we eschew — solar, increasing use of sensors and electronics in automobiles, etc. And at the end of his presentation, he had two graphs.

Without the ability to reproduce them here, we will just summarize them. One showed the correlation of silver to gold, copper, and oil. It showed a very noticeable correlation to gold, and not so much copper, and virtually none with oil.

The second chart showed, for each trading day over a period of time, a gold colored up-bar if silver traded with gold, or a gray down-bar if it traded with other commodities. By eye, it looked like over 99% of days, silver was with gold.

In other words, you can safely ignore all the talk about industrial uses of silver. And mine production. And recycling. Demand for silver, as with gold, is monetary reservation demand. Silver is still money (whew, right?!).

So why a ratio over 90:1? Those who demand gold for monetary reserve are a different group than those who demand silver. As always, gold is owned by those rich enough to afford it. An ounce of gold is several weeks of the wages of an unskilled laborer, or more than a week of the wages of the median worker in the US. And more than that outside America.

Institutions, including central banks, demand gold almost exclusively, with little silver other than perhaps family offices and hedge funds that may have a broader charter.

A 90:1 ratio tells us that the wage-earners who cannot afford gold are either not able or not willing to increase their monetary reservation demand. At least this is true relative to risk asset owners (who are near peak levels of equity after so many years of bull markets).

For a $20 silver price (and 75:1 ratio, assuming gold is priced at $1,500), look not to a great increase in consumer electronics or industrial demand. Look to a shift in either the mindset or capacity to buy silver among wage-earners. And maybe a shift in sentiment among wealthier savers who have the option of using silver — and who may be attracted to the relative bargain.

However, from the look of that chart we have been updated (see below, under silver) that today is not that day.

Fundamental Developments

Now let’s look at the only true picture of supply and demand for gold and silver. But, first, here is the chart of the prices of gold and silver.

Gold and silver priced in USD

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio rose further.

Gold-silver ratio

Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price.

Gold basis, co-basis and the USD priced in milligrams of gold

The dollar was basically unchanged. Gold scarcity (i.e., the co-basis) dropped a hair.

The Monetary Metals Gold Fundamental Price dropped slightly to $1,402. It’s a bit above market, but not a lot.

Now let’s look at silver.

Silver basis, co-basis and the USD priced in grams of silver

The July silver contract approaches expiry, and it is no surprise that it has tipped back into backwardation, with a sharp increase in the co-basis. However, the silver basis continuous shows a slight drop in scarcity.

The Monetary Metals Silver Fundamental Price dropped back to $15.49.

Here is an update of the ratios of the gold to silver basis and co-basis.

Ratio of gold-to-silver basis and ratio of gold-to-silver co-basis

There is a move favoring silver (i.e. silver being the scarcer metal in current market conditions), but this week it was a small one.

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